Explaining the Methods of Hard-Money Lenders

Leonard Rosen, an unofficial spokesman for hard-money lenders, at an industry seminar in March.

As banks continue tightening their purse strings, hard-money lenders are pouncing on the opportunity to lend to shunned borrowers. It’s not the major financial firms you’d expect. As we write today, more of these lenders are everyday investors tapping their savings accounts to make a profit doling out mortgages.

So how does it work?

Through brokers, hard-money lenders offer high-interest, short-term loans to borrowers who can’t get traditional bank financing, including investors and people with spotty credit. The interest rate can be in the high teens — compared with less than 5% for bank mortgages — while the length can be as short as a few months.

Hard-money lenders don’t focus much on a borrower’s credit scores. They care more about asset valuations and loan-to-value ratios. Many lenders won’t lend more than 50% to 70% of the home’s value, while banks will lend as much as 80% and government-backed loans can go as high as 96.5%.